ECON 160 Chapter Notes - Chapter 8: Economic Surplus, Deadweight Loss, Demand Curve
9 Dec 2016
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Chapter 8: application: the cost of taxation: the deadweight loss of taxation. The impact of a tax on a market outcome is the same whether the tax is levied on buyers or sellers of a good. When a tax is levied on buyers, the demand curve shifts downward by the size of the tax. When a tax is levied on sellers, the supply curve shifts upward by that amount. When the tax is enacted, the price paid by buyers rises, and the price received by sellers falls. Elasticities of supply and demand determine how the tax burden is distributed between producers and consumers. A tax on a good causes the size of the market for the good to shrink: how a tax affects market participants. The benefit received by buyers in a market is measured by consumer surplus. Amount buyers are willing to pay for the good minus the amount they actually pay for it.
